Observations focused on the problems of an underdeveloped country, Venezuela, with some serendipity about the world (orchids, techs, science, investments, politics) at large. A famous Venezuelan, Juan Pablo Perez Alfonzo, referred to oil as the devil's excrement. For countries, easy wealth appears indeed to be the sure path to failure. Venezuela might be a clear example of that.

Archive for February, 2015

When I began this blog, my objective was to show to those abroad how Chavismo’s claims were always exaggerated and inaccurate, how history was being changed and how Chavismo twisted the truth and the law just enough to get its own way to kidnap the State and its institutions. This objective of this message was achieved long ago, thanks to many people, blogs and institutions.

What Venezuela faces today is quite different. All institutions of Government, checks, balances and the rule of law are in the hands of the same ideological party and Government. Media is mostly controlled by Chavismo, and what little is not, is either being asphyxiated by the Government (Tal Cual is shutting down its daily edition today due to the lack of newsprint) or uses self-censorship in order to avoid confrontations with the Government.

But the level of paranoia and indolence exhibited by Government and PSUV officials has now reached levels of insensitivity that even after observing Chavismo for sixteen years simply flabbergast me.

Upon the death of a 14 year old school boy this week in the hands of a member of the national police, the Government machinery immediately began spinning the murder . The facts are clear, the kid was leaving school and was caught in the middle of a demonstration, he hid under car and a policeman pulled him out of from under it. As the kid started telling the cop not to repress them, the cop simply shot at his head, with whatever type of gun he was using, killing him. As if this was not sufficient, the cops then tried to drag the body away with their motorcycle, but they were stopped by the friends of the kid and the protesters who simply could not believe what was happening.

Before any specific facts were known, Maduro, who was in Trinidad, made statements suggesting that Colombian paramilitary groups had infiltrated the country into San Cristobal (where the murder occurred) and that the kid belonged to a right wing sect…Yes, he was the member of a Boy Scout troop. Maduro also spewed out all his usual vile about the US wanting to overthrow him, the right wing opposition and the like.

Soon after that, the General Prosecutor said the cop had been detained and would be charged, among other things, with using an illegal weapon in the control of protests. This was clearly denied by both the “People’s'” Ombudsman and the investigative police, both of which said that the kid was killed with a gun that “only” shot plastic pellets. Witnesses said that the wounds the kid had in his head were not consistent with plastic pellets, as there were deep gashes and burn marks around them.

By now the Government in its cynicism, is portraying (The Prosecutor dixit) the cop and the kid both as “victims” of the right wing. Yes, the young cop is also a victim, but it is a victim of the hatred and indoctrination of the police corps, where human rights and respect are not promoted. Instead, it is a culture of repression and hate which is promoted daily in these organizations filled with loyal members of Chavismo.

And the Governor of Tachira State, gets all worked up because people are calling for the abrogation of Decree 8610, the same one that allowed the use of guns by the armed forces in the control of protests, because the murder of the 14 year old kid “had nothing to do with that decree”. Of course it does, when the Minister of Defense calls a decree which violates Human Rights agreements “beautiful”, the murder of this kid has everything to do with the culture and the atmosphere of repression created by Chavismo in Venezuela.

And to prove this point, in the last week, six young kids, all under 23, all near protests or protesting or detained during protests, were either shot dead in the head or found later shot in the head. All were students. none ever detained before.

Meanwhile, the new media purchased by unknown foreign investors (not allowed by law, but who pays attention?) does not even report the death until hours later, suggesting the students were all attacking the cops or part of the demonstrations. Meanwhile, the “Dean” of Venezuelan Journalism, who presides over one of these, Ultimas Noticias, says he does not even know who purchased the newspaper, but they want to have a “different medium” and defends the concept that some sort of weird coup was indeed staged against Nicolas Maduro.

What a sad and cynical role this supposed “Dean” of Journalism and freedom of expression is playing in the Venezuelan tragedy.

And just as you think you have heard enough, Maduro tells the world (if it was listening) that the world’s powers have to “rationalize” the use of oil. Funny point to make, from the leader of a country which has doubled daily gasoline consumption since 2001, by giving it away for almost free. But as if this was not enough, he called for the use of clean energies and techniques. I guess he is so concerned with the environment, that this is why he eliminated the Ministry of the Environment last year.

But the beat goes on for Chavismo. The lines at supermarkets are invisible, non-existent and just part of the economic war. The protests are led by USA trained and backed 20 year old students, inflation is not a problem and God will provide. They hope.

And as the family of the 14 year old that was murdered buries him, there are no words of condolences, no expressions of compassion. Just a warning that if the opposition gets pesky and the protests over the deaths, or shortages, or inflation continue, the Government may be forced to ban the opposition, so that it can proceed to have elections in democracy and peace later this year.

Such is the cynical logic of Chavismo/Madurismo today. There is no gray area anymore, just cynicism and insensitivity for all …

After two weeks of threatening to arrest him, intelligence police (SEBIN) raided the offices of Caracas Mayor Antonio Ledezama and forcibly took him away while shooting into the air as they left. The intelligence police had no arrest warrant and it was not until President Maduro later spoke on forced nationwide TV that the President confirmed that he had been arrested “on orders” from the Prosecutor.

Venezuelan media did not report the incident (other than El Nacional) for hours, as people gathered outside the SEBIN offices near Plaza Venezuela. But it was not until the early hours of the morning that it was learned that Ledezma was being held in El Helicoide.

Maduro claimed that Ledezma would be tried for his “crimes against peace”, noting in particular, that he had signed a letter which was nothing but a conspiracy against him. The letter was signed by Ledezma, Leopolodo Lopez and Maria Corina Machado and called for a “transition Government” of national unity.

Maduro revealed that he had been in Cuba during the Carnival break, suggesting that this strategy was cooked up there. The strategy is likely to be to create protests, intimidate and at the same time distract the population from the numerous economic problems the country has. This is a typical strategy by Chavismo of becoming aggressive whenever its popularity goes down, looking to show that the President (Chávez then, Maduro now) is in charge and deserves the support of its sympathizers.

The concern is that what the Government wants to do is minimize the leadership of the opposition ahead of the Parliamentary elections. Polls suggest that Chavismo will lose such an election by a wide margin, but at this time Maduro is likely trying to stop the opposition from obtaining a 2/3 majority. If this were the case, the National Assembly could approve Bills before the new Assembly takes over, moving subjects, such as budgetary approval and the like, to the Executive branch. If the opposition did not obtain the 2/3 majority it would be unable to overturn such Bills.

The detention does little to help the image of Maduro internationally, but it has been clear for quite a while that he cares little about that and is behaving like an outright Dictator. The outcry so far internationally is the loudest since the detention of Leopoldo Lopez, but the immediate reaction and condemnation of the detention.

For the opposition, taking advantage of the Government’s low popularity will not be easy. The opposition lacks access to the media and has precarious financing. If its leadership were to be jailed, the battle would become even more uphill to obtain 2/3 of the Deputies in the National Assembly. Any possible Electoral discrepancies would never be investigated, Chavismo would achieve its goal of keeping power no matter what. Clearly, there seems to be no one that opposes Maduro within the Government at this time.

Going forward repression is likely to increase as the Government sets aside any pretense of being democratic.

Just my luck that last night just as I pushed the Publish button, I received a copy of Foreign Exchange Agreement #33, regulating the new “market”, different than the Cencoex Bs. 6.3 per US$ system and the Bs. 12+ Sicad system. Then this afternoon I received the regulations for the securities part of SIMADI. In some sense, it is good that it happened this way, otherwise lst night’s post may have been too long, complex and boring.

To give you my punchline right away: SIMADI may be a system, but a market, it ain’t.

In fact, it an extraordinarily complex and bizarre system for buying and selling currency. It even makes you wonder why it is that way…

SIMADI has three parts:

1) The cash retail system

2) The bank cash system

3) The bank and broker securities system

Let’s look at each of them:

1) The cash retail system

This market called “menudeo” will function via foreign exchange houses and banks and be devoted only to individuals. Minimum is US$ 300 and it will be limited to US$ 300 per day, US$ 2,000 per month and US$ 10,000 per year for each individual,

How does it work? You go to your bank or exchange house and buy or sell dollars at yesterday’s exchange rate for the system. This will also be (yesterday’s rate) the referential rate for credit card transactions and custom duties.

2) The cash bank system

This is likely the weirdest one. Minimum is US$ 3,000. You also buy at yesterday’s rate, however, each bank can only buy and sell foreign currency with its own clients. That is, there is no interbank system or market. You buy and sell only with the clients of your bank and at yesterday’s price. To make it even weirder, banks can not hold positions. That is they can not buy dollars for their own account in this system, only by buying (selling) cash from clients and selling (buying) cash to other ones. If they buy too much on a given day, they have to sell any excess foreign currency to the Venezuelan Central Bank. Oh yeah! If you are a client and want to do either, you have to send the bank either the Bolívars or the US$ to the bank ahead of time. Only if they are there is the bank allowed to do the transaction.

3) The securities system

The securities system will operate in the Bolivarian Stock Exchange, where all authorized brokers and banks can operate. They can buy or sell dollar denominated securities in exchange for Bolivars at an agreed rate.

However, they can not do transactions with anyone but their clients and other brokers and banks can not be your client. i.e. You have the sellers you can find buyers among your clients. That’s it. When you sell the bonds in US$, the dollars from the transaction have to go to your Venezuelan banking system dollar based account.

In this market, brokers and banks can take positions, i.e. they can buy, for example, dollars from a client, keep it and later sell it to another client, but not to another broker or bank.

Oh yeah! The Central Bank does have to approve the transactions you close.

Thus, this is no market. This is just a bizarre system. Why do you need to do this via an exchange is a mystery, except that the Government wants to keep tabs of transactions, but there are no bids or asks, the clients of your institution (to use the language of the regulations) agree on a price and you do the transaction at that price. But you don’t talk to other market players. You only look at previous transactions and try to have your clients agree on a price.

What does this mean?

-The price has a strange way of being constructed.

-There is no market per se

-If you are a bank or a broker, you can only sell however many dollars your own clients sell to you.

-I suspect that Government-owned banks will have a huge advantage as the Government, the largest generator, provider, holder of foreign currency, will likely give its own banks bonds or foreign currency to trade. They will have a gigantic advantage over private banks. Once again, leave the private sector out of it as much as possible, maybe the word “marginal” refers to the role of the private sector in all this.

-The parallel market still exists. Moreover, there will be arbitrage now not only between Cencoex and Sicad and the parallel rate, but there will also be arbitrage between SIMADI and the parallel rate. And a privileged few will make a lot of easy money.

-Market it is not, just a bizarre and complex system to exchange foreign currency.

I waited until today to write about yesterday’s announcements about the “new” fx system, because we were promised for today some decrees relating to the rules that would oversee these supposedly new fx system. But much like everything that has happened so far in 2015, there are new delays and who knows when these new rules will come out. And in any case, they may be irrelevant anyway, or to use a word that is en vogue, the details of the rule may be marginal to the whole subject and its future.

Maduro took three weeks in January traveling around the world begging for money. Then he took four days after coming back to give a speech in which he announced that “in the next few days” we would know the details about this newfangled, state of the art new system for doing what people have been doing for centuries: Exchanging one currency for another. But the few days for this complex task, took three weeks and it was not until yesterday that we heard some details details.

The new system has three parts. The first two are a rate for Cencoex (same name) of Bs. 6.3 (same number) per US$ and a rate for Sicad (same name) which will start at Bs. 12 (same number again) per US$. Thus, so far 66% of the “new” three part system is identical to what has been in place since April 2014. In fact, it is so identical that even the percentages of foreign currency indicated by the Minister that will be sold in each market are practically the same as estimates of how foreign currency was distributed last year in the two systems.

And then there is the new and marginal third fx system, which will be called the Sistema Marginal de Divisas (SIMADI) (Marginal system for Foreign currency)

Really, you can’t make this stuff up.

Now, about the only thing we know about this “new” system for real is that it will have a price higher than the old Sicad 2 system and that it will be called SIMADI, which is the subject of numerous jokes including SIstema de MAduro y DIosdado.

The rest, is having to take at face value what the Minister of Finance and the President of the Central Bank said about it:

i) It will be a system subject to “market” forces. Free Floating.

ii) It will have no limitations or restrictions.

iii) It will operate via banks, brokers and exchange companies, but there will be a limit in the latter.

However, to participate in the “market”, the rules will be the same as for Sicad 2: You have to register, open an account in US$ in a bank in Venezuela and provide your last Venezuelan tax return.

Now, according to Maduro today, from 3-5% of all foreign currency will flow through this system. At today’s oil prices that is about US$ 1.5 billion at the top range of 5%. Of course, Merentes and Torres talked about “anyone” can sell in this market and that it would start “near” the parallel market rate and then go down. Yeah, everyone is waiting to sell…

Well, pardon me for being so skeptical. Let’s assume that the parallel rate is Bs. 200 (it has never reached that, but makes calculations easier). If the Government plans to sell only US$ 1.5 billion in this market during the whole year, that would take barely Bs. 300 billion out of the monetary liquidity which stands at Bs. 2 trillion today. That means, that only 15% of the monetary liquidity has to go to the SIMADI, in order to wipe out the US$ 1.5 billion. That is peanuts, more so, when M2 has been growing steadily at a rate of 65% per year, which means that another Bs. 300 billion would go into the system in just one quarter and a lot of it will also be looking to leave the country.

Why?

Easy, let’s look at the other side of the equation: Demand. There is lots of pent up demand, because essentially the parallel market has been illegal for the last four years. Many corporations refuse to participate if it is illegal, but now they have a way of doing it if its is legal, free-floating and unlimited. Additionally, given the shortages in the country, companies, people, will use this new market to obtain foreign currency, either to import, to complete supplies or raw materials to produce stuff in Venezuela or buy widgets to sell locally. Finally, the market has been dry lately, savers, companies, everyone with any sense of self-protection will look to take its savings abroad via this market at a a time of increasing political instability and uncertianity.

Given all this, I expect much more than 15% of the monetary liquidity to go to this market and at this time, it does not seem the Government is making an effort to have more foreign currency (by devaluing the other two rates), nor to reduce the deficit which is financed by money printing.

Thus, I can only conclude that this market is unlikely to be free, unlimited and market driven, for the simple reason that the Government does not want the rate to rise without control. And if it tries, it will eventually shut down the market, much like it did in 2010, as the parallel rate will drive inflation, no matter how marginal the Government wants you to believe it is.

As we say in Venezuela, we have seen this movie before, which means there will be limits, regulations, etc. and in the end the system will look a lot like Sicad 2, but at a higher price. Making it the same as that in place in most of 2014, but at a higher and controlled price.

And thus, truly marginal.

P.D. PDVSA issued a 2022 bond without telling the market, which it can use to supply the system. It is a US$ 3 billion issue, but its price will be around 34% at current levels, so that it could contribute US$ one billion to this market. I still think its not enough.

Lines at a Government owned supermarket in the middle of Caracas, almost daily now

Some people have written to me, asking why I have been so quiet, when so much has been going on in Venezuela with the takeover of Farmatodo and Dia Dia and the jailing of its owners.The reason is simple, yes, there is a lot going on, but to me what happened to Farmatodo and Dia Dia is more of the same, going back to the takeover of the Coca Cola warehouse way back in 2003 and going thru the nationalization (and destruction) of Agroisleña, or the Dakazo, or so many takeovers, nationalizations and jailings that have taken place under the Chavismo Dictatorship.

After all, Chavismo took over Dia Dia, a company founded in 2005 only to serve the lower strata of the population, the sort of project the Government should back and promote and not destroy, which is all it is doing by taking it over. After all, it is merging it with the Abastos Bicentenario (and stealing its inventory) , which was created when the Government forcefully took a majority stake in Cativen and its Exito hypermarkets.

They have not been the same since and have lines as long or longer than those of the private sector.

Thus, there is really nothing much different happening with the events of the last few days or weeks. What is puzzling, and I don’t have the answer for it, is why Chavismo (or Maduro) takes this self-destruction route. If I knew, I would have written a post about it.

Because what the Government is doing is sending very mixed signals. On the one hand, it dollarizes airline tickets, airline cargo and talks about a new “market” (I doubt it!) for foreign currency at a higher price than Sicad 2, but on the other, Maduro keeps confronting, threatening and acting like a Dictator, despite the fact that his popularity is in the low teens, according to the latest polls.

So, what gives?

I don’t know. The Comandante Eterno used to do the same thing when things got tough, but he was Chávez and Maduro ain’t. So, either Maduro is getting bad advice or he is full of himself. Personally, I don’t think Maduro can last this way until the Parliamentary elections. He can last, but he will have to repress a lot of people in order to survive.

But we don’t even know whether Maduro is completely in charge or whether others are telling him what to do, including his wife Cilia.

But I am sorry to tell you, the Government is not acting as stupidly as many lead you to believe. To start, they got US 1.9 billion from the Dominican Republic, which purchased its Petrocaribe debt at less than half price. Then Citgo sold US$ 1.5 billion in a 2022 bond at a yield to maturity with a coupon of 11.5% and borrowed an additional US$1 billion from banks by pledging terminals and its shares. Not bad, US$ 4.5 billion at the blink of an eye in Maduro’s coffers. Jamaica could do the same and then Maduro may decide to close his eyes and send the gold to London and problem solved for 2015. Yeap, just like that, we are thinking 2016 and not 2015.

Oil is a many splendored thing indeed! Except Venezuelans are in charge…

My guess is that Maduro is betting (hoping?) that oil bounces from here and PSUV can keep control of the National Assembly. A tough and balancing act, given that the country will only feel the under-50 oil prices in March and April. Lines could indeed be long by the time Easter week comes around.

Yes, they are likely to become longer…

But things are really paralyzed right now, as the private sector awaits a foreign exchange system that I don’t believe will be functioning before Easter. Yeap! Think about it. You need to change the Illicit Controls Bill to allow the new market to function. This is at least two weeks from the time of he proposal, since it has to be approved by the National Assembly. Then, you need to issue the new foreign exchange agreement between the Government and the Central Bank, which is just a decree, but it has to follow the the Bill approved by the Assembly. After that, you need to issue the regulations for the market to function. Given that in one week Venezuela and its Government will be paralyzed by the Carnival holidays, even Easter may seem optimistic for this indecisive Government.

Which in the end is the biggest handicap of the Maduro administration. It is not only indecisive, but it has no clear view that a really free floating fx system will be any better. Except someone has told them to stick with it. And they want to try it out, but not everyone agrees.

So, we enter a very uncertain period, with many surprises possible. It is truly uncertain territory with a very indecisive and flip flopping Government. But it is clear there is a short term strategy in place, hoping for the best in the long term. And it will likely fail, leading to uncertainty, chaos and social unrest.